'By virtue of exchange, one man's prosperity is beneficial to all others.' – Frédéric Bastiat

Energy Transportation and Negative Externalities: The Argument for Sound Regulation

On the heels of my analysis of whether Newfoundland and Labrador has become a “petroprovince,” I examine another aspect of the natural resource development: safety and negative externalities, i.e. environmental costs. In particular, this blog post will focus on the rising usage of large oil tankers for transporting Canadian petroleum products overseas.

Because of Canada’s generous resource endowments, it has become one of the largest oil producing countries and exporters in the world. The proposed Keystone XL pipeline appears to be floundering, however, and the shale gas boom in the United States has withered consumer demand in that country for Canadian exports–both of which have encouraged Canadian producers to look for new markets in emerging economies.

Expanding into overseas markets necessarily requires maritime transportation in the form of transoceanic supertankers, and as demand for energy rises in emerging economies, so too will tanker traffic. Citing devastating spills such as Exxon Valdez, however, several individuals and groups have made an effort to ban or heavily restrict such traffic. Yet, there is a serious economic rationale for continuing to develop, and promote, Canada’s energy sector and the more important issue is developing and promoting it responsibly.

Oil spills have astronomical ecological and economic costs and environmentalists who have concerns about them are justified. In a study published recently by the Fraser Institute, however, the authors note that Canadian tanker traffic has increased by leaps and bounds despite accidents declining sharply, which they argue is the result of better safety practices, smarter regulations, and technological innovation. To reinforce the downward trend in accidents, the most effective regulatory regime is one that requires stringent safety protocols such as corrosion-proof lining for supertankers, in addition to rigorous and frequent inspections to ensure that firms meet these requirements, i.e. a first “line of defense.” Furthermore, establishing safe, well-monitored shipping routes would also reduce accident probability.

Incentives matter and, therefore, policymaking must be independent of private sector interests. (Energy companies have a market-based incentive to avoid losses, which encourages them to take precautions, but many firms fail to pay for their negative externalities.) In addition, regulatory agencies can structure their fine schedules to compensate entirely for the externality costs of environmental damage, which would ensure that firms bear all of the potential costs when making decisions about safety. Canada should also maintain a comprehensive and streamlined oil-spill response strategy that would help contain the damage and repair it, i.e. a second “line of defense.” Lastly, Canadian governments could invest in research and development into containment techniques for “dirty” substances such as diluted bitumen. (Note: most of these precautions exist within the Canadian regulatory structure.)

Some stringent opponents of natural resource development, however, posit that spills are never worth the risk. The nightmarish consequences of many infamous spills haunt the collective memories of coastal communities and environmentalists tend to assume the potential costs to the local economy will outweigh the potential economic benefits. Diluted bitumen, for example, has unknown effects in maritime environments and could prove to be very damaging if it spilled in a maritime setting. Ultimately, those who seriously oppose natural resource development and energy transportation argue that disasters are statistically inevitable and, therefore, not worth risking Canada’s fragile ecosystem and tourist “brand” of having a pristine coastline.

There are several problems with the above link of thinking, however, the most glaring of which is the “inevitability” argument. Indeed, oil spills are inevitable, but so too are all accidents. All economic activities carry some risk, whether they are human, environmental, or financial. Air accidents, for example, have steadily decreased in the last few decades, and although additional accidents are inevitable, it would be unwise to ban air travel. In essence, opponents of natural resource development would like a moratorium on tanker traffic. This approach, however, would stymie efforts within the energy sector to develop safer transportation mechanisms and it could encourage alternative forms of transport that are more dangerous such as rail. Most importantly, it would cripple Canada’s economic prospects and damage our living standards. These caveats show precisely why the apparently calm, well-reasoned rhetoric of the anti-tanker movement is simply a knee-jerk reaction that ignores many constructive solutions to a complex challenge.

Leo Plumer is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in economics and political science at McGill University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies